The indefinite postponement of the $11 billion Joslyn North mine near Fort McMurray, Alta. may signal a shift in global economics that could impact oil and gas construction in Western Canada.
“The world’s not always going to be rosy for that (type of) project,” said Richard Dixon, executive director of Centre for Applied Business Research in Energy and the Environment at University of Alberta.
He said the changing economics of the project is part of the normal boom and bust of the market.
The profit margins on a barrel of oil are currently tight.
Total E&P Canada’s CEO Andre Goffart told the Canadian Press that the company had been unable to find a formula under which the economics of the project would work.
Total E&P Canada is the Canadian arm of French oil giant Total SA. Suncor Energy.
Occidental Petroleum and Japan’s Inpex are also partners in the project.
Another likely factor in the decision to shelve the project is the soaring costs of starting an oilsands operation.
Dixon said the days of getting oil the easy way are coming to a close, and while there are high tech solutions, they cause costs to skyrocket.
Dixon said an average conventional well drill would cost about $500,000 several years ago.
Now, it can cost as much as $6 million to drill.
He said companies starting massive projects are having to factor in the changing oil market and rising costs by having contingency plans that allow them to get out or put them on hold.
Large companies are already planning decades ahead.
Dixon cited Shell’s scenario planning, which predicts three things by 2050: A more carbon constrained world, energy demand will double and oil will be harder to get.
Alex Carrick, Reed Construction Data’s chief Canadian economist, said part of Total E&P’s problem is the stagnant price of oil, which has been hovering around US$100 for nearly four years.
“This is really not normal for the history of oil prices,” he said.
Carrick said that the high cost of development paired with the stagnant oil prices can make companies worried that they might not get the return they need.
He said that despite this, eventually the price of oil will respond and these projects will be able to resume. Carrick explained that on some level, this is exactly what some of the companies behind these massive projects may want to happen.
Too many large projects moving ahead at the same time strains the construction industry, causing costs to rise.
“That creates bottlenecks on supply,” he said.
Companies can keep those costs down by staggering these projects.
The International Energy Association’s annual outlook on investment, released this month, echoed Carrick and Dixon’s thoughts.
It showed that the days of cheap oil are forever gone.
According to the report, yearly investment in new fuel and electricity supply has more than doubled in real terms since 2000.
Costs to the oil and gas industry also have doubled in that period.
The IEA report stated that an estimated US$48 trillion in investment will be needed by 2035 to quench global demand for energy, an annual 25 per cent increase from what is currently invested.
• With files from the Canadian Press